Foreign Firms Received Funds

Data From Fed Show Lenders Got Emergency Cash

By

Jon Hilsenrath And

Liz Rappaport

Updated Dec. 2, 2010 12:01 a.m. ET

The Federal Reserve, forced by Congress to release details on trillions of dollars' worth of loans made during the financial crisis, disclosed the breadth of its lending to U.S. businesses desperate to raise cash and the surprising degree to which it supported struggling foreign banks in the worst days of 2008 and 2009.

The lending, most of which has been paid back, represents the Fed's most aggressive intervention in the economy ever, and included loans to stalwart industrial companies such as General Electric Co.GE-0.08% and Verizon Communications Inc.VZ0.26% Though the Fed has been credited with helping prevent many banks and firms from collapsing as credit markets stopped functioning, critics also say the Fed overreached and the latest disclosures could open new fault lines.

The scale of the Fed's lending was widely known. In all it funneled $3.3 trillion worth of credit to different parts of the economy and financial system through an array of programs during the crisis. But the specifics of who got the money hadn't been known.

Foreign banks received hundreds of billions of dollars in short-term loans from the Fed. Among the biggest loans from a Fed commercial-paper lending program was one to Swiss banking giant UBS AG, which tapped it for $37 billion in October 2008. BarclaysBCS0.84% PLC, the British bank that declined to rescue Lehman Brothers but later bought much of it from bankruptcy, tapped the Fed for roughly $10 billion in commercial-paper loans in October 2008.

All the borrowings were repaid by the end of 2009, a Barclays spokesman said. A UBS representative said its borrowing was relatively modest, done to give it flexibility during the crisis and was fully repaid.

The Federal Reserve today lifted the curtain on the long-awaited details of its emergency lending program during the financial crisis. David Reilly, Jon Hilsenrath & Dennis Berman discuss some of the surprising findings.

The Fed's support of foreign banks was rooted in its effort to hold together the crumbling and heavily interconnected financial system. Government officials at the time were concerned the failure of another big financial firm after the collapse of Lehman Brothers would severely damage the global economy.

Dexia AGDEXB0.00%, a Belgian bank, turned to the Fed for $23 billion in 2008. Commerzbank AGCRZBY0.70%, a German bank, came for $13 billion for commercial-paper loans and turned to another Fed loan facility 25 times for short-term loans of as much as $7.25 billion.

With a Little Help From the Fed

Which broker-dealers made the most use of the Fed's emergency lending from March 17, 2008, to May 12, 2008.

"It is clear foreign institutions were large users of the Fed's facilities, in part as a way to channel dollars to their European home bases," said Robert Eisenbeis, chief monetary economist at Cumberland Advisors.

Also on the list was the banking arm of the South Korean government, foreign auto makers and other foreign firms that held U.S. mortgage-backed securities they couldn't sell when financial markets froze.

"After years of stonewalling by the Fed, the American people are finally learning the incredible and jaw-dropping details of the Fed's multitrillion-dollar bailout of Wall Street and corporate America," said Sen. Bernie Sanders, a Vermont independent whose amendment to the Dodd-Frank financial-regulatory bill forced the disclosures. He said the lending to foreign firms was especially striking and demanded "an extensive look."

Among other details to emerge:

• Goldman Sachs Group Inc.GS-1.03% and Morgan StanleyMS-1.17% borrowed directly from the Fed 84 and 212 times, respectively, after the collapse of Lehman Brothers in September 2008. Goldman's overnight loans peaked at $18 billion in mid-October. Morgan Stanley borrowed more, as its chief executive, John Mack, was complaining that the bank was target of speculators betting it would fail. In its most troubled days in late September 2008, Morgan and its London arm borrowed nearly $60 billion.

Fed Emergency Lending

• GE, one of the nation's largest corporations, turned to the Fed for short-term loans, known as commercial paper, when that market dried up. GE—mainly to help its financial arm GE Capital—tapped the Fed for $2.3 billion on Oct. 27, 2008, and returned for the next four days, taking more than $12 billion in total.

• Nine of the 10 largest money-market fund companies at the time, with total assets under management of about $2.4 trillion, including BlackRock Inc.,BLK-0.72% Fidelity Investments Inc. and Dreyfus Corp., turned to the Fed for cash as investors fled the funds for safer ground.

The fresh details on about 21,000 transactions are likely to intensify public and political scrutiny of the Fed, including its lending to foreign entities.

Fed officials and their counterparts overseas feared that what started as a crisis in U.S. subprime mortgages could turn into a global meltdown. One problem: Many of the foreign banks that got Fed money were active in U.S. debt markets—including mortgage and municipal bonds. They depended on U.S. dollar loans to fund their holdings of U.S. debt and could have been forced to sell the bonds without funding. That, in turn, would have worsened the crisis for U.S. firms and homeowners.

In addition to making hundreds of billions of dollars of loans to banks, the Fed shipped nearly $600 billion of credit directly to foreign central banks.

Earlier

Several hedge funds, including a few that have been blamed for helping cause the crisis, were able along the way to profit from Fed lending programs as its rescue efforts grew to a grand scale.

The new data identified a few individuals who benefited indirectly from Fed programs. Among them were John Paulson, the billionaire hedge-fund manager who made a fortune betting against mortgage bonds in the lead-up to the crisis, and Michael Dell, the founder of Dell Inc.

They invested in OneWest Bank, which received $34 million in low-interest financing from the Fed to invest in securities backed by consumer loans.

The details of the borrowing by financial firms could factor in Fed and Treasury deliberations, now under way, about which firms could pose risks to the financial system and thus should get stepped-up scrutiny from regulators. The data show that the Fed saw an array of firms—from money-market funds to investment banks—as systemically important in the crisis.

Recipients of the loans expressed gratitude. "The Fed's actions were timely and critical, and we commend them for providing liquidity and stabilizing the financial system during that period," Morgan Stanley said in a statement.

A Goldman spokesman said the Fed was "successful" at fixing broken financial markets. Russell Wilkerson, a GE spokesman, said the Fed should be "commended for coming up with an effective program" to repair the commercial-paper markets.

The Fed said in a statement that its programs fostered economic growth and financial stability, and that it followed "sound risk-management practices" in running the programs.

The Fed lent through 10 programs in all. Taken together, the programs funneled $3.3 trillion of credit into the financial system at different times in the crisis.

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